What it is:
A credit bureau is an agency that collects, organizes, and disseminates credit information to creditors and potential creditors. Credit bureaus generally collect information on individuals and small businesses.
How it works (Example):
The three main credit bureaus in the United States are Equifax, Experian, and TransUnion. The information they collect is organized into credit reports. The reports include a history of payments to creditors, how much debt a borrower currently has, their maximum credit limits, names and addresses of current creditors, and several others indicators of a person's ability to repay debt.
Banks, credit card companies, prospective employers, and other clients who may be considering entering into a credit relationship with a customer frequently purchase credit report with the intention of determining the reliability of loan applicants, job candidates, and even potential tenants.
Why it Matters:
Credit bureaus do not determine whether a person qualifies for credit from a particular lender, how much they can receive, or what interest payments will be. What the potential lender sees in the borrower's financial history does. Fortunately, this is not the only factor that lenders consider when deciding whether to extend credit -- lenders also look at things like the person's income, employment history, and character.
It is important to note that each credit bureau may have different information on the same individual, and so individuals must be sure to check their credit reports often for mistakes.
Credit bureaus do a lot of the legwork and give lenders a fast summary of a person's creditworthiness. This in turn facilitates faster lending processes.